Should you change your mutual fund portfolio?

Ruth Saldanha: January 1 marked the implementation of Canada’s Client Focused Reforms, a broad set of regulatory changes designed to improve the investor experience. What does this mean for your mutual funds in 2022? And are there any changes you should make now as a result? Morningstar Canada’s director of manager research, Danielle LeClair, is here with us today to discuss it.

Danielle, thank you very much for being here today.

Danielle LeClair: Thank you for hosting me.

Saldanha: For starters, what do you think is the impact of CFRs on mutual fund sales and distributions this year?

LeClair: As you mentioned, Ruth, I think there will be a lot of changes as a result of the CFRs here in Canada. If you think about it from a fund company’s perspective, we could see fund companies reduce the range of mutual funds they offer if they feel that asking for information about your products is too onerous to their resources. That said, we could also see them expanding their range of opportunities if their range is not considered wide enough for investors to create a portfolio that suits their investment goals appropriately.

What I would like to see, however, is a move away from the fad products or targeted fund list type sales tactics that tend to be driven by asset managers’ business objectives and not investment objectives of our clients. So really, I’d like to see a move towards more personalized approaches that put investors’ goals first.

Saldanha: One of the things that really bothers investors is that my fund is going to close. So, do you anticipate fund closures, and if so, which sectors or fund types are likely to be most impacted?

LeClair: It’s a really interesting question because my initial instinct is to say that thematic funds could really suffer from these objectives. So, as Morningstar has previously reported, thematic funds tend to have higher risk profiles and have higher fees, which can be harder to justify from a suitability perspective in a portfolio. global. But we also reported that there has been significant investor interest in these strategies. So there’s a bit of a dichotomy in the market on that, so it’ll be interesting to see how that plays out. But one thing I will say is that the flagships of companies that have the ability to absorb any potential cost increases for these more transparent disclosures could probably benefit.

Saldanha: And what does all of this mean for my mutual fund portfolio right now? I mean, what changes, if any, should I make?

LeClair: So rather than looking at CFRs as a driver for change, I think they are a driver for really enabling investors to better understand their portfolios, to ensure that each of these individual components adheres to their overall goals. So things like, if you have a higher fee fund, does that make sense for your portfolio goals; do you hold funds from just one fund company and, if so, is there a broader universe you should consider when building your portfolio; and finally, if you are a high or low risk portfolio investor, should you really look and make sure that you hold the right kinds of strategies that align with these objective trends.

Saldanha: And aside from CFRs, what risk or opportunity should Canadian mutual fund investors be watching for this year?

LeClair: It’s a very busy market these days and if I had to highlight one risk and one opportunity, one risk would be continued market volatility, whether it’s inflation issues, supply chain shortages supply, oil prices or just a general pandemic. Investors should really consider a diversified portfolio to help offset some of these risks. And then, from an opportunity perspective, ESG and sustainable investing really presents an opportunity for investors to align their portfolios not just with their financial goals but also with their values. And we’re seeing strong growth in the market to give investors a much broader set of opportunities to be able to do that.

Saldanha: Thank you very much for joining us today with your views, Danielle.

LeClair: Thank you.

Saldanha: For Morningstar, I’m Ruth Saldanha.

Dolores W. Simon